Ask The Experts: Money Matters

By Mike Miles

Taxation of lump-sum annual leave payment

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Q. I understand that the lump-sum payment for unused annual leave is treated as wage and salary income and is subject to federal and state (if any) income tax, FICA (Social Security) and Medicare taxes. How is it treated for Thrift Savings Plan purposes? Are individual and government matching contributions made? Can a retiring employee top up their contributions from the lump sum (up to the IRS-determined maximum)?

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Contribute annual leave payout to TSP?

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Q. I am CSRS and plan to retire Jan. 3, 2014. Since my annual leave payout will be part of my final paycheck and thus will be taxed as 2014 earned income, can I contribute part of it to Thrift Savings Plan for 2014 even though I will be retired?

A. No.

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State tax on annual leave payment

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Q. We plan to retire from Washington, D.C., this year and currently live in Virginia. When we retire, we will immediately relocate to Nevada. Do we have to pay Virginia state tax on our annual leave check?

A. This is a question for a CPA.

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Retiring and deferring pay into TSP

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Q. I am retiring Jan. 23 from CSRS. Hence, I will be paid in 2013 for about 1½ pay periods. Can I have all of that pay go to the Thrift Savings Plan, tax-deferred? Can I also have my lump-sum annual leave payment go to TSP, tax-deferred, up to the annual limits?

A. Your pay can be deferred into the TSP, but not your leave payout.

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How to invest your annual leave check

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Q: Since I’m not allowed to deposit my lump-sum annual leave check into my Thrift Savings Plan account, where’s the next best place to put it? Will this amount be considered part of my 2010 income regardless?

A: Generally, I prefer the following order for retirement savings deposits: TSP, deductable individual retirement account, Roth IRA, taxable brokerage account. Your income will be taxable in the year in which you constructively receive it.

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